My apologies for absence yesterday but, like it or not, I do have to emerge from my cave from time to time and venture into the Big Smoke in order to catch up with some of those with their fingers on the pulse. Judging by how little more most of them can sense about what happens next and why, I suppose my vantage point well away from the vortex doesn’t seem to be quite as wrong as it sometimes feels. Elephants are easier to observe with binoculars than they are with microscopes.
On the subject of elephants, how about Deutsche Bank? I was chatting on the phone on Tuesday with a fellow scribbler who blithely declared that Deutsche was an investment bank and that it wasn’t really systemically important to Germany, that there was enough corporate lending capacity in the Landesbank network and that, so the inference goes, its demise would not be the end of the world. There speaks a cynic who has, in my humble opinion, no idea of what makes Germany tick. Deutsche might not be the only pole holding up the circus tent but it is the central one and although, if it were to go, the tent might not collapse entirely, there would be no way the high-wire act could go on and thus the entire performance would be ruined.
I think most of the arguments with respect to mainland Europe’s failure to slash and burn its banking system in the aftermath of the global financial crisis have been chewed over in the press so I won’t go there. Where I will go, however, is into the problems that were created by what was for so long admired in other countries, namely the state-guaranteed banking subculture. The Landesbanks, with their explicit guarantees, had funding costs with which the Deutsche Banks, the Commerzbanks and the Dresdner Banks of this world could not compete. The result was that they were obliged to either lend at tighter net spreads to the domestic market or go and look for business elsewhere where returns were not necessarily higher but where the competition on the liability side of the balance sheet wasn’t quite so fierce.
Whereas other banks, though not generally German ones, went out and bought retail banking networks across the globe, Deutsche, imbued in a culture where commercial and high street banking didn’t pay, focused on becoming a global investment bank with a commercial bank’s balance sheet behind it, acquiring Morgan Grenfell, Bankers Trust and with it Alex Brown and so on. History is littered with failed cross-border acquisitions of retail banks but it had generally been assumed that global investment banking should work better. Well, maybe not. I recall back in my days at Barclays when BZW was put together and when the one-stop shop, the universal banking model, began to emerge. I noted back then that the culture of commercial banking had always been “How much can this loan cost me?” whereas in investment banking the question was always ”How much can this deal make me?”. When commercial bankers began to think like investment bankers and the latter were given the run of the balance sheet, it simply had to, eventually, go horribly wrong.
That said, there is another issue which is bugging me. I have one close friend who, some years ago, took over as chairman and CEO of a small but highly prestigious luxury car brand. The dream job of a lifetime! I was on the phone to him one morning and asked him what life was like in the chair of such a wonderful brand. He answered me “Well, just trying to sell a product for more than it costs me to make…”. I learnt a lesson then which was that business is about selling whatever you have for the highest price the market will pay for it.
Now there is no question that there have been cases of abuse, severe abuse even, in financial services but trying to impose a US$14bn fine on a bank is no less abusive and no less of a case of trying to squeeze out of a situation the most money the counterparty can bear. More to the point, the world of banking has so many outsiders trying to fiddle with it that it has lost its ability to price risk correctly and if risk isn’t correctly priced, then it cannot be fully accounted for. Banks sit right in the middle of the capitalist system but they no longer function under the laws of capitalism as they are regulated to death on their activities in a world where the cost of money across the entire curve is manipulated by central authorities and where “2BIG2FAIL” still applies.
Deutsche cannot fail and Deutsche will not fail. What we don’t yet know is which stakeholders will be called to account and to what extent. That the rats are leaving the sinking ship is no surprise for over the years authorities have made pretty much made it clear that everybody other than retail depositors might be called in, though never to what extent and where the liability might be capped. How can one realistically trade an asset if the downside limit is controlled by somebody who is neither willing or able to reveal what that might be? Is Deutsche’s problem and at the same time its solution that it is too late to apply the rules of capitalism? Enough.
It is quarter end; time to take one’s marks and to assume that the central banks have markets so closely by the scruff of the neck that nothing too horrid will occur between now and year-end. Despite all the fears and wobbles, 1987 this is not.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. I shall be hosting my 14-year-old, 6ft 2in great nephew this weekend. I have yet to go out and purchase the entire contents of a supermarket in order to keep him fuelled. We will be off doing boy things, mainly on four wheels and with ample horsepower of course. I know the Paris Motor Show is all about electric cars, which is fine and dandy, but how a nuclear-free Germany expects to be able to charge the little buggers escapes me. I remember when we were all being told that the way of the future was the Wankel rotary engine… Well, you never know but for the while I’ll stick with V12s fuelled by liquefied dinosaurs…